Open End Indenture

Posted in Finance, Accounting and Economics Terms, Total Reads: 508

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Definition: Open End Indenture

An Open End Indenture is a legal written contract between a bond issuer and its lender, that details specific terms of the bond issuance. It states that the collateral securing the bond may also secure other bond issues which the issuer of the bond may issue in the future and use the collateral to cover the costs of the new issues. An Open End Indenture permits the sale of additional bonds only if it meets the earnings test.

Open End Indentures can be issued both by financially sick companies and successful companies. Bonds issued under Open End Indenture carries high interest rates. An Open End Indenture can be advantageous for the companies as at times they are simpler and more efficient to make additional issues on the same collateral. Investors who purchases bonds with an Open End Indenture should either have a lot of trust in the issuing company or have a lot of information regarding the bond and the company.

Example: Suppose an indenture states that the additional bonds could be sold if the net revenues available for debt service for past 10 years equals to 125% of the debt service required for the present and proposed bonds. If the above earnings test is met, then only the issuing company can issue additional bonds.